"Lower inflation and rising job numbers show our long term plan is working, and bringing greater economic security.

"But there is still much more we need to do to build the resilient economy I spoke of at the Budget."

Earnings have not increased at a higher rate than inflation since a brief spike in March and April 2010 and have not consistently been improving since 2008.

An end to the squeeze will be seen as a watershed moment in the recovery, and likely to be seized upon by the Coalition to blunt Labour charges that the economic upturn has yet to benefit ordinary working families.

The latest figures showed pressure on households was partly eased by food and non-alcoholic drink inflation falling to a new four-year low of 1.7%. It was last lower, at 1.3%, in February 2010.

But a greater downward pressure on inflation came from fuel pump prices.

Petrol was unchanged from February to March this year compared to a rise of 2.2p per litre at the same period in 2013. Diesel fell by 0.4p compared with a 1.9p rise in 2013.

Clothing and footwear prices increased by a lower rate than last year, with much of the downward effect from women's fashions.

Upward contributions to inflation came from factors including higher bills for overnight hotel stays, and more expensive alcoholic spirits.

A separate measure of inflation, the Retail Prices Index, which includes housing costs, fell to 2.5% in March from 2.7% in February.

And a new measure of inflation, CPIH, which also includes housing costs, fell to 1.5%, down from 1.6% in February.

Chief Secretary to the Treasury Danny Alexander said: "Inflation slowed to 1.6% - easing inflation, more jobs and a growing economy further evidence that the plan is working."

Economist Alan Clarke of Scotiabank said the latest CPI reading was likely to mark the low point in UK inflation.

A rebound is likely to come from the impact of Easter holidays on airfares and a smaller lower impact from petrol prices.

But the improving purchasing power signalled by the expected return to real-terms wage growth "increases the likelihood that the recovery will persist", he said.

"At the moment, consumer spending growth is being boosted by falling savings and rising borrowing.

"If real incomes continue to improve over the coming quarters (as we expect), then spending growth will be increasingly underpinned by solid fundamentals rather than the feel-good factor associated with a booming housing market."

"Looking ahead, we continue to think that a combination of stable commodity prices, falling import prices and recovering productivity will push CPI inflation as low as 1% before the year is out.

"This would provide more solid foundations for the recovery in consumer spending and enable the MPC to keep Bank Rate at 0.5% until late 2015."

Howard Archer of IHS Global Insight said: "The gap between earnings growth and inflation looks set to become increasingly positive over the coming months - albeit relatively gradually - which is supportive to growth prospects and would be a relief for the Government, given Labour's focus on a cost-of-living crisis."

Ben Brettell of Hargreaves Lansdown said the figures "confirm the complete absence of pressure on the Bank of England to raise interest rates".

It leaves the Bank with continued leeway to leave rates at their historic low of 0.5% for as long as policymakers deem is necessary to support the recovery.

Mr Brettell said: "Today's figures are a mixed blessing for savers. Inflation is eroding their capital more slowly than previously, but lower inflation also lessens the chances of deposit rates improving."